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German Banks Have Big Investment in Greece

By Dealbook April 28, 2010 5:20 pmApril 28, 2010 5:20 pm

There may be a good reason why German taxpayers are so unhappy about having to lend money to Greece. In effect, they already have. Germany’s financial institutions hold some 28 billion euros, or $37 billion, in Greek bonds, Barclays Capital estimates, extrapolating from International Monetary Fund data, Jack Ewing of The New York Times reports from Frankfurt.

A quick survey of Germany’s largest banks on Wednesday indicates that probably half of that debt — rated “junk” by Standard & Poor’s since Tuesday — sits on the balance sheets of institutions that are owned or controlled by the government. The percentage could be much higher, but outsiders have no way of knowing for sure because bank regulators and many of the banks refuse to disclose precise numbers.

Germany’s existing exposure to Greek debt easily exceeds the 8.3 billion euros that the country would lend to Greece as part of a European Union plan to help the country avoid default on its debt — though not the 24 billion euros that may eventually be needed from Germany. Hypo Real Estate Group alone holds 7.9 billion euros worth of Greek debt. And, after a bailout last year, the taxpayers own Hypo Real Estate.

Germany’s direct exposure to Greek debt provides another reason the country’s problems are very much Europe’s problems. “It’s not just a question of paying for Greece’s luxury pensions. There are intrinsically strong German interests as well,” said Alessandro Leipold, former acting director of the I.M.F.’s European Department.

Greece’s fiscal crisis not only threatens the credibility of the euro and the stability of the European economy, it also threatens to hit government budgets in a very direct way, perhaps requiring them to again pump money into banks they have already rescued once.

“If the banks take a hit, then the German government will be involved again,” said Jürgen von Hagen, a professor of economics at the University of Bonn.

One reason that German political leaders have rejected all talk of restructuring Greek debt, requiring banks to share some of the pain, is that they know that taxpayers would ultimately get the bill, Mr. von Hagen said.

“I have a sense that is one reason why Mr. Schäuble does not want to involve the banks,” said Mr. von Hagen, referring to the German finance minister, Wolfgang Schäuble.

Germany is by no means the only European country that is exposed to Greek debt. France is Greece’s biggest creditor, with 50 billion euros in holdings, including 7 billion euros held by the Bank of France, according to Barclays. Italy holds 20 billion euros in Greek paper, followed closely by Belgium, the Netherlands and Luxembourg.

The European Central Bank is also exposed to Greek debt, which it accepts as collateral when lending to euro-area banks. One question is what the E.C.B. will do if the other major ratings agencies also downgrade Greek debt, which would make the bonds ineligible as collateral.

Analysts expect that the E.C.B., which has already adjusted its rules to accommodate lower-rated bonds, would find a way to prevent Greek debt from being completely ineligible. “The E.C.B. in principle is always free to change its policy in the interests of financial market stability,” said Jörg Krämer, chief economist at Commerzbank.

S.&P.’s downgrade of Spanish government debt Wednesday is the latest indication that the Greek syndrome is spreading. Investors “have now moved on to what appears to be a full-blown bond market crash across the periphery,” economists at Royal Bank of Scotland said in a note Wednesday.

Even if other governments do not default, downgrades cut the value of their bonds on open markets and hurt bank balance sheets.

There is a lack of precise data on which banks are most exposed to Greece and its now bad paper. But the case of Hypo Real Estate suggests that the holdings could be concentrated at a few institutions that were badly managed and acquired too much risk. Hypo Real Estate’s total exposure to the so-called PIIGS — Portugal, Italy, Ireland, Greece and Spain — is 39 billion euros.

Westdeutsche Landesbank, owned by state and local governments in northwestern Germany, had some 12 billion euros in holdings in those countries. As part of a drastic restructuring plan after severe losses during the financial crisis, the bank put all but 1 billion euros of its paper in those countries in a separate institution formed to try to dispose of the bad assets.

Commerzbank, of which the government owns 25 percent as well as has veto power on major decisions, holds 3 billion euros in Greek debt.

In Spain, it is the midsize banks that have suffered the most from the collapse of the country’s construction industry. They have been struggling to clean up bad real estate loans on their balance sheets, and could face another hit if their holdings of Spanish government bonds lost value.

“Spanish banks did not have direct exposure to toxic assets like the German Landesbanks,” said Xavier Vives, a professor of economics at IESE Business School in Barcelona. “They had their own toxic assets.”

Spain’s big banks, which have so far escaped the worst of the financial crisis, could suffer if Portugal goes the way of Greece. Banco Santander, based in Madrid, has assets in Portugal valued at 48 billion euros, according analysts at Nomura in London.

Even if Europe’s bigger banks are not heavily exposed to Greek debt, they could see a surge in bad loans in the country as local companies suffer from a sharp economic downturn. “There is the whole question about what you do about corporate borrowing, and there are implications for Germany as well,” said Leila Heckman, senior managing director at Mesirow Financial in Chicago.

Deutsche Bank’s chief financial officer, Stefan Krause, said Tuesday that the bank would feel the effects of a deeper Greek crisis. “We don’t have much exposure to Greece directly. We are not concerned,” Mr. Krause said during a conference call with analysts. He added, “We could not completely isolate ourselves if the situation gets worse.”